According to the Bureau of Labor Statistics (BLS), United States headline inflation rose by 60bps to 8.5% y/y in March (February: +7.9% y/y) – the highest since December 1981 (+8.9% y/y). As observed in recent months, we highlight that the surge in inflationary pressures for the review month was due to the combined impact of (1) food and energy shortages arising from the Russia-Ukraine conflict and (2) COVID-19 restrictive measures in China’s major production cities (Shenzhen, Guangzhou, Shanghai, and Beijing) which provide critical supplies to the US factories. Accordingly, price pressures were most significant in the Energy (32.0% y/y vs February: 25.6% y/y), Food (8.8% y/y vs February: 7.9% y/y), and Shelter (5.0% y/y vs February: 4.7% y/y) sub-baskets. On a month-on-month basis, the headline inflation rose by 1.2% (February: 0.8% m/m). We believe inflationary pressures are biased to the upside in the short term, given the impact of the lingering Russia-Ukraine conflict amidst elevated consumer demand. Accordingly, we expect the FOMC to raise the key policy rate further by at least 25bps at its next meeting in May.

According to the Office for National Statistics (ONS), the United Kingdom’s (UK) headline inflation rate settled at 7.0% y/y in March (February: 6.2% y/y) – the highest since March 1992 (7.1% y/y). The surge in inflationary pressures primarily reflects the intertwining impact of (1) persistent increase in energy prices exacerbated by the Russia-Ukraine conflict and (2) lingering supply chain challenges. Accordingly, pressures remain significant in the prices of transport (13.4% y/y vs February: 11.5% y/y), food (5.9% y/y vs February: 5.1% y/y), housing & utilities (7.7% y/y vs February: 7.2% y/y), and furniture & household equipment (10.3% y/y vs February: 9.1% y/y). On a month-on-month basis, the headline inflation rose by 1.1% (February: 0.8% m/m), the highest print in five months. We expect inflationary pressures to maintain an upward trajectory in the short term, given the sharp increase in energy and agricultural prices induced by the Russia-Ukraine conflict. Consequently, we think sustained domestic price pressures could put more pressure on the Bank of England (BOE) to further raise the key policy rate, primarily to ensure that inflation expectations are well anchored.

Global Markets

Equities markets across the globe settled lower as concerns about rising inflation, aggressive moves by central banks, and escalating Russia-Ukraine crisis stoked worries about the global economic outlook. Accordingly, US stocks (DJIA -0.5%; and S&P 500: -0.9%) were poised for a weekly loss as investors traded cautiously following hot inflation data and a mixed bag of corporate earnings. European (STOXX Europe: -0.9% and FTSE 100: -1.5%) equities were on track to end the week with losses as investors digested the latest policy announcement from the European Central Bank (ECB). In Asia, the Japanese (Nikkei 225: +0.7%) market was poised for a weekly gain boosted by tech shares trailing early gains on Wall Street. The Chinese (SSE: -0.8%) equities was set for a weekly loss as new COVID-19 cases in Shanghai dented hopes for a quick exit from the citywide lockdown. Likewise, the Emerging market (MSCI EM: -0.8%) stock mirrored the bearish trend across global stocks consequent upon losses in China (-0.8%), while the Frontier market (MSCI FM: 0.0%) stock was unchanged.

Nigeria

Economy

Nigeria’s oil sector continues to grapple with low crude oil production, reflecting age-long challenges facing the sector. Based on the OPEC’s Monthly Oil Market Report (MOMR), Nigeria’s crude oil production (excluding condensates) averaged 1.35mb/d in March (February: 1.38mb/d) – 21.5% below the OPEC+ production agreement (1.72mb/d) for the month. Accordingly, average crude oil production settled at 1.38mb/d in Q1-22 (Q4-21: 1.32mb/d). In our opinion, the prominent factors responsible for the recurring low crude oil production level include (1) massive theft and vandalism, (2) difficulties in restarting the oil wells for operation after the COVID-19 induced shutdown, (3) infrastructure decay, and (4) divestments given the challenging business environment amidst companies’ move to cleaner energy sources. Overall, we do not expect a significant improvement in crude oil production over the short term, given the nature of challenges hampering production. Accordingly, despite the rally in crude oil prices, we expect the government’s oil revenue performance to remain underwhelming over the short term.

According to the recently released data from the Nigerian National Petroleum Corporation (NNPC), the corporation incurred NGN219.78 billion as PMS under-recovery cost in January (December 2021: NGN210.38 billion). The under-recovery cost for the review month consists of NGN195.98 billion January value shortfall and part of the November 2021 spot cargo arrears (NGN23.81 billion). That said, the NNPC further estimated that it would deduct NGN328.00 billion from March 2022 proceeds due to be shared by the three tiers of government at the April FAAC meeting. The estimated deduction consists of NGN253.00 billion as PMS under-recovery cost in February and the balance of November 2021 Spot Cargo Arrears (NGN75.00 billion). We expect under-recovery costs to increase significantly over the short-to-medium term, given the rise in crude oil prices compared to the 2021FY levels. Consequently, we estimate PMS under-recovery cost to settle at NGN3.55 trillion (or 56.8% of our estimated FGN’s retained revenue) in 2022E (vs 2021FY: NGN1.61 trillion or 34.3% of FGN’s retained revenue).

Capital markets
 
Equities
 
In line with our prognosis, local stocks staged an impressive comeback from last week’s rout as investors reacted positively to MTNN’s PSB license approval amid bargain hunting across tickers with attractive attractive entry points. Accordingly, the domestic bourse traded positively in all sessions of the Easter holiday-shortened week. Precisely, the All-Share Index rose by 1.9% w/w, to 47,510.38 points. Notably, bargain hunting in NB (+11.8%), ZENITHBANK (+8.7%), GTCO (+6.5%), OKOMUOIL (+5.6%), MTNN (+3.4%) and DANGCEM (+2.4%) spurred the weekly gain. Consequently, the MTD and YTD return increased to +1.2% and 11.2%, respectively. Activity levels were upbeat, as trading volume and value rose by 10.9% and 109.2% w/w, respectively. Sectoral performance was broadly positive following gains in the Banking (+5.6%), Consumer Goods (+1.9%), Industrial Goods (+1.6%), Oil and Gas (+1.6%) and Insurance (+1.1%) indices.

In the near term, we expect the bulls to retain dominance given the positioning for the Q1-22 earnings announcements, even as institutional investors continue to search for clues on the direction of yields in the FI market. However, we advise investors to take positions in only fundamentally justified stocks as the weak macro environment remains a significant headwind for corporate earnings.

Money market and fixed income

Money market

This week, the overnight (OVN) rate expanded by 492bps w/w to 11.2%, as outflows for net NTB issuances (NGN17.78 billion) pressured the system amid the week’s sole inflow from OMO maturities (NGN48.47 billion).

We expect system liquidity to be pressured in the coming week. We believe the anticipated inflows from OMO maturities (NGN23.95 billion) will most likely be outweighed by the weekly auctions (OMO & FX) and possible CRR debits. Thus, we expect the OVN rate to trend northwards.

Treasury bills

The Treasury bills secondary market remained bearish, with market participants readying bids for this week’s NTB PMA in anticipation of an increase in NTB stop rates. Consequently, the average yield across all instruments inched higher by 2bps to 3.4%. Across the market segments, the average yield expanded by 11bps to 3.7% in the OMO segment but was flat at 3.3% in the NTB segment. At this week’s NTB PMA, the CBN offered NGN141.26 billion – NGN2.19 billion of the 91-day, NGN6.95 billion of the 182-day, and NGN132.12 billion of the 364-day – in bills. Ultimately, the CBN allotted NGN159.03 billion – NGN4.51 billion of the 91-day, NGN10.56 billion of the 182-day and NGN143.97 billion of the 364-day bills – at respective stop rates of 1.74% (previously: 1.75%), 3.00% (unchanged), and 4.60% (previously: 4.45%).

With system liquidity expected to be tight in the coming week, we anticipate a further increase in the average yields on T-bills from current levels.

Bonds

Like the prior week, bearish sentiments dominated the treasury bonds secondary market, as demand for FGN bonds remained tepid amid continued profit-taking activities on selected instruments. Thus, the average yield expanded by 7bps w/w to 11.1%. Specifically, we witnessed profit-taking across the short (+21bps) and long (+3bps) ends of the benchmark curve, following sell-offs of the JAN-2026 (+55bps) and MAR-2035 (+17bps) bonds, respectively. Meanwhile, the average yield was flat at the mid segment.

We maintain our view of an uptick in bond yields in the medium term, especially as we start a liquidity stiffened Q2-22, with the FGN’s borrowing plan (NGN675 billion) for Q2-2022 pointing towards an elevated supply.

Foreign Exchange

Nigeria’s FX reserves increased by USD53.48 million w/w to USD39.71 billion (12th April 2022). Meanwhile, the naira depreciated both at the I&E window (IEW) and parallel market by 0.2% to NGN417.50/USD and 0.5% to NGN590.00/USD, respectively. At the IEW, total turnover (as of 13th April 2022) declined by 14.7% WTD to USD498.85 million, with trades consummated within the NGN410.00 – NGN453.15/USD band. In the Forwards market, the naira was flat at the 1-month (NGN418.12/USD) and 6-months (NGN432.47/USD) contracts but appreciated at the 3-months (+0.1% to NGN423.78/USD) and 1-year (+0.2% to NGN448.01/USD) contracts.

In our opinion, the CBN has enough supply to support the FX market over the short term, given inflows from the recently issued Eurobond and the IMF’s SDR. However, foreign inflows are paramount for sustained FX liquidity over the medium term, in line with our expectation that accretion to the reserves will be weak given that crude oil production levels remain quite low. Thus, FPIs which have historically supported supply levels in the IEW (53.8% of FX inflows to the IEW in 2019FY) will be needed to sustain FX liquidity levels. Hence, we think (1) further adjustments in the NGN/USD peg closer to its fair value and (2) flexibility in the exchange rate would significantly attract foreign inflows back to the market.